The unseen is more dangerous than the obvious

John Nyaradi is Publisher of
Wall Street Sector Selector, a financial media site focused on news,
analysis and information about exchange traded funds and global financial and
economic developments.
John's investment articles have appeared in many online publications including
MarketWatch, Trading Markets, Money Show, Yahoo Finance, Investors Insight,
Fidelity, ETF Daily News, iStock Analyst and his interviews have appeared on
MarketWatch, Yahoo Finance's Breakout, National Business Talk Radio, Sound
Investing, and The Index Investing Show. His book, "Super
Sectors: How to Outsmart the Market Using Sector Rotation and ETFs", is
included among the Years Top Investment Books in the 2011 Stock Trader’s
Almanac.

As the fiscal cliff drama gobbles up global financial headlines, other important financial news and developments slip under the radar, putting investors at unseen risk.

Here's what's on my radar that should be on yours:

Moody's Investors Service downgrades the European Stability Mechanism and the European Financial Stability Facility. Those two funds are the primary bailout facilities for Europe and both were downgraded from Aaa to Aa1, with negative outlooks. The recent downgrade of France, an important contributor to the funds, inflicted "contagion" on the funds, in much the same manner as debt contagion can afflict euro-zone member states. The fact that the bailout funds were downgraded is likely to be of more significance than the credit downgrade of a particular nation. It is as though the euro zone's financial health-care provider has taken ill. Nevertheless, the story managed to get lost in the shuffle of fiscal cliff political posturing. Despite the lack of attention to this news, the European debt problem still exists and has the potential for causing more trouble down the road in the form of higher sovereign debt yields and regional financial instability.

Greece is in selective default. On Wednesday afternoon, Standard & Poor’s lowered Greece's rating to selective default in response to the bond-buyback program that the country is currently undertaking to get its next round of bailout money. The agency views this as a distressed debt restructuring and so cut Greece's credit rating to SD which means selective default from its previous reading of CCC. So the latest Greek "fix" puts the country into default as it attempts to buy back its own bonds at well below face value to bring down its towering debt load. Greece is the problem that just keeps on giving and we can expect it to continue roiling markets as we head into 2013.

QE4 is coming to a theater near you. The drama never ends but the Fed's "Operation Twist" is scheduled to end at the end of the month. The FOMC, the Federal Reserve's Open Market Committee will meet on Dec. 11-12, and at the top of their agenda will likely be QE4, some sort of new bond buying to extend or replace "Operation Twist." Operation Twist involved the trading of short-term bonds with longer-term bonds, at the rate of $45 billion per month, while QE3 involves the purchase of $40 billion in mortgage-backed securities per month. Is "QE" finished as an effective tool to bolster the U.S. economy, demand and stock prices? If so, we're about to enter a new era of risk asset pricing.

The U.S. economy is slowing. The Institute for Supply Management's November Purchasing Managers' Index dipped into contractionary territory at 49.5. Wednesday's ADP National Employment Report came in at 118,000, down sharply from October's 157,000 and widely missing the expected 125,000. Fourth-quarter earnings look weak, as 73% of companies issuing Q4 earnings guidance so far have been negative according to FactSet.com. Slowing growth and slowing earnings cannot make one optimistic about the near-term future of equity prices.

The "Apple Indicator" flashes a warning. Much ado was made regarding Apple's historic fall on Wednesday as it shed more than $30 billion in market cap in its 6.34% plunge. But the headlines missed the key element of this story which is "as Apple goes, so goes the market." As the dominant member of the S&P 500 and Nasdaq Composite, Apple is the 800-pound gorilla in the U.S. equity world, and when Apple sneezes, the U.S. stock market catches a cold. On a technical basis, Apple is very close to forming a "death cross," an unusual event with significant potential repercussions for the broader U.S. stock market.

The cure to the fiscal cliff is a fiscal chasm. President Obama and the Congressional leadership can snipe at each other all they want regarding taxing the rich or not and how to fix Medicare, but the bottom line is the growing likelihood of a long period of slow growth or no growth ahead for the U.S. and global economy. Any combination of tax increases or spending cuts is likely to significantly impact U.S. economic growth that is already forecast to be as little as 1% in Q4 according to several prominent economic analysts. An unseen recession appears to be lurking just around the corner and no matter what happens with the fiscal cliff, we face a long journey through a dark fiscal chasm ahead.

Wall Street Sector Selector remains in "red flag" mode. Danger and opportunity always arrive hand in hand, and we have plenty of both in today's world in which the unseen is more dangerous than the obvious.

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